House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Josh Frydenberg MP)

Chapter 3 - Advice fees in superannuation (recommendations 3.2 and 3.3)

Outline of chapter

3.1 Schedule 3 to the Bill amends the SIS Act to provide greater protection for superannuation members against paying fees for no service. The amendments increase the visibility of advice fees for all superannuation products and prohibit the charging of ongoing fees for financial product advice from MySuper products.

3.2 These amendments will protect superannuation members and provide them with the opportunity to make informed assessments about the value of the advice they are receiving and paying for out of their superannuation interest.

3.3 The amendments implement the Government's response to recommendations 3.2 and 3.3 of the Financial Services Royal Commission.

Context of amendments

3.4 The SIS Act sets out the general fee charging rules in Part 11A (general fee rules) on charging and deducting fees from a superannuation interest, including:

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prohibiting the charging of entry fees and exit fees;

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applying a fee cap on low balance products; and

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prohibiting the cost of advice provided to employers being borne by members.

3.5 Part 2C of the SIS Act contains additional rules about the fees that can be charged to a MySuper product (MySuper fee rules), including a list of allowable fees and how these fees can be charged. These rules apply in conjunction with the general fee rules.

3.6 MySuper products are simple products with basic features and one investment option or a lifecycle investment strategy. These products are designed as 'default' options suitable for, but not limited to, disengaged members.

3.7 Section 99F of the SIS Act prohibits a superannuation trustee from passing the costs of particular types of financial product advice incurred by one member on to any other member.

3.8 Financial product advice that is collectively charged to members (because it is not prohibited by section 99F of the SIS Act) is generally referred to as 'intra-fund advice', although this is not defined as such in the Act. Such advice usually involves less complex, non-ongoing personal advice available to all members about their interest in the fund.

3.9 Under the MySuper fee rules, fees can only be charged to a MySuper product if they fall within one of seven categories and comply with applicable 'charging rules' (see sections 29V and 29VA of the SIS Act). The seven categories are: administration fees, investment fees, buy-sell spreads, switching fees, activity fees, advice fees and insurance fees.

3.10 It is a general expectation that superannuation trustees have in place appropriate systems for ensuring compliance with the general fee rules and MySuper fee rules.

Financial Services Royal Commission

3.11 Recommendations 3.2 and 3.3 of the Financial Services Royal Commission were to prohibit the deduction of advice fees (other than for infra-fund advice) from MySuper products and limit the deduction of advice fees from choice products.

3.12 A key concern of Commissioner Hayne about advice fees charged to superannuation products is that members have little visibility over ongoing advice fees and that there were instances where these fees were charged without the member's awareness or informed consent. Commissioner Hayne also emphasised that advice fees should only be paid for the actual provision of a service.

3.13 In recommendation 3.2, Commissioner Hayne suggested removing the ability for superannuation trustees to deduct advice fees (other than for intra-fund advice) from a MySuper product, consistent with the status of MySuper as a simple product with basic features. Commissioner Hayne's view was that members who wish to obtain financial advice about their superannuation should pay for that advice directly.

3.14 There is no reason to suggest that advice needs, particularly for those approaching retirement, would be any different for members in a MySuper or choice product. Having different fee rules for deducting advice fees from MySuper and choice products may have prevented individuals with MySuper accounts from accessing advice or have created incentives for members to move from MySuper to choice products in order to pay for financial advice using superannuation.

3.15 The amendments to Part 2C of the SIS Act prohibit ongoing advice fees from being deducted from MySuper accounts, but allow non-ongoing client-authorised advice fees (including multiple instances of one-off advice) to be deducted. The amendments allow MySuper members to continue to access once-off financial advice, with fees charged to their superannuation interest if the requirements set out in Part 2C (MySuper) and Part 11A (General fees rules) of the SIS Act are satisfied.

3.16 The implementation approach adopted prohibits ongoing advice fees in MySuper, which Commissioner Hayne identified as carrying the most risk of fees being charged for no service.

3.17 Recommendation 3.3 was to prohibit the deduction of an advice fee (other than for intra-fund advice) from superannuation accounts, except where the requirements about annual renewal, prior written identification of services and provision of the client's express written authority have been met. These requirements were set out in recommendation 2.1 in connection with ongoing fee arrangements (see Chapter 1).

3.18 Commissioner Hayne made clear that intra-fund advice should not be subject to the prohibitions on advice fees that he recommended and noted that during the Financial Services Royal Commission there was no suggestion of misconduct associated with intra-fund advice.

Summary of new law

3.19 Schedule 3 to the Bill amends Part 11A of the SIS Act to ensure that a superannuation trustee can only charge advice fees (other than fees for intra-fund advice) to a member where certain conditions are satisfied. These conditions are that:

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the fee is in accordance with an arrangement that the member has entered into;

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the member has consented in writing to being charged the fee; and

•

the trustee has the written consent or a copy of it.

3.20 These requirements apply to all advice fees that are charged to a member, irrespective of whether they are charged on an ongoing basis. This is consistent with superannuation trustees' existing obligations, including the best interests duty and the sole purpose test, as well as the expectation that trustees have appropriate oversight of fees that are deducted from members' accounts.

3.21 The Schedule also amends Part 2C of the SIS Act to remove a superannuation trustee's ability to charge fees under an ongoing fee arrangement for financial product advice from MySuper products. Trustees are still permitted to charge fees related to a non-ongoing fee arrangement from a MySuper product. Trustees are required to comply with the MySuper fee rules and the fee arrangement consent requirements set out in the amendments to Part 11A of the SIS Act.

3.22 Superannuation trustees are still permitted to charge fees in relation to intra-fund advice as administration fees (which must be collectively charged in accordance the charging rules in section 29VA of the SIS Act).

3.23 These amendments implement the Government's response to recommendations 3.2 and 3.3 of the Financial Services Royal Commission.

Comparison of key features of new law and current law

Detailed explanation of new law

Advice fees

3.24 The amendments introduce new requirements into Part 11A of the SIS Act for charging fees in respect of financial advice.

3.25 A superannuation trustee cannot charge a member for the cost of financial product advice provided to the member, unless:

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the cost is to be paid in accordance with the terms of an arrangement entered into by the member;

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the member has expressly consented in writing to being charged for the cost of providing the financial advice; and

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the trustee has the written consent, or a copy of the written consent.

[Schedule 3, items 2 and 3, section 99FA of the SIS Act]

3.26 These requirements apply to the trustee when the cost of providing financial product advice in relation to a member is paid from the member's superannuation interest, and not where the member is paying those costs from funds held outside the superannuation system.

3.27 The amendments to the general fee rules relate to charging a member for the cost of providing financial product advice to the member. It does not matter whether or not a particular fee is described as an 'advice fee'. This approach is consistent with other fee rules such as section 99F of the SIS Act (which applies to costs of financial advice that are collectively charged, irrespective of how they are labelled).

3.28 Similarly for MySuper products, the definition of advice fees for the purposes of the MySuper fee rules are any fees that relate directly to costs incurred in the course of providing financial advice to the member.

3.29 The new requirements contained in the amendments to the general fee rules apply to all advice fees that are not collectively charged, including those charged in relation to MySuper products.

3.30 The new requirements apply to a superannuation trustee any time the cost of advice is to be deducted from a member's superannuation account in relation to advice provided to the member. It does not matter whether the trustee provided the advice directly to the member, or whether the advice was provided by a third party if the cost is deducted from the member's superannuation account.

Fees must be charged in accordance with an arrangement

3.31 The term 'arrangement' takes its ordinary meaning and includes both ongoing fee arrangements and non-ongoing arrangements. The use of the term arrangement ensures that the new requirements in the SIS Act are appropriately linked to the requirements for ongoing fee arrangements in the Corporations Act.

3.32 In addition to the requirements in section 99FA of the SIS Act, advice fees charged in relation to MySuper products must relate to a fee arrangement that is not an ongoing fee arrangement. [Schedule 3, item 7, section 29VA(9A)(d) and (e) of the SIS Act]

3.33 The requirements oblige superannuation trustees to consider the basis on which a particular fee for financial product advice is charged and be satisfied that the fee relates to a cost that is to be paid in accordance with an arrangement that the member has agreed to. The additional requirements concerning member consent to being charged an advice fee apply in conjunction with the requirements about arrangements.

3.34 Schedule 3 to the Bill amends the definition of an activity fee in the MySuper fee rules in the SIS Act to prevent any fee that satisfies the definition of advice fee in the fee charging rules instead being treated as an activity fee. This ensures that the amendments apply as intended. [Schedule 3, items 4, 5 and 6, sections 29V(7)(aa), 29V(7)(b) and 29V(8)(b) of the SIS Act]

Ongoing fee arrangements

3.35 An ongoing fee arrangement is defined in section 962A of the Corporations Act as an arrangement under which:

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a financial services licensee or their representative gives personal advice to a person as a retail client;

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that person enters into an arrangement with the financial services licensee or a representative of the financial services licensee; and

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under that arrangement a fee is to be paid during a period of more than 12 months.

[Schedule 3, item 1, definition of 'ongoing fee arrangement' in section 10(1) of the SIS Act]

3.36 Division 3 of Part 7.7A of the Corporations Act, as amended by Schedule 1 to the Bill implementing the Government's response to recommendation 2.1 of the Financial Services Royal Commission, contains requirements that must be satisfied in relation to ongoing fee arrangements for any financial product advice. These include the requirement that advisers renew the arrangement annually, and outline to the client both the services that will be provided and the fees that will be charged in the next 12 months.

3.37 A failure to comply with these requirements results in the statutory termination of an ongoing fee arrangement. This means that there will no longer be any arrangement in accordance with which fees can be charged (see Chapter 1; section 962F(1) of the Corporations Act, as amended by Schedule 1 to the Bill, and new section 962FA, inserted by Schedule 1 to the Bill).

3.38 Superannuation trustees are expected to obtain sufficient information so that they are satisfied that an ongoing fee arrangement exists and the relevant fee is covered by that arrangement. In practice, trustees may be able to rely on information provided in the written consents (described below) that they must obtain before deducting fees. However, this will be a matter for individual trustees to assess, having regard to the information that is provided in those consent forms and any other processes that the trustees have in place.

3.39 Trustees must comply with any other requirements applicable to them (for example, any general requirements under the Corporations Act and the SIS Act).

Non-ongoing fee arrangements

3.40 Non-ongoing fee arrangements are not defined in the Corporations Act but refer to any arrangement that relates to a particular service provided to the member on a one-off basis or over a period of up to 12 months. Fees for financial product advice related to a MySuper product are only able to be charged to a MySuper product in relation to a non-ongoing fee arrangement.

3.41 Superannuation trustees must determine whether there is an arrangement in accordance with which the relevant fee can be charged and must comply with any other requirements applicable to them (for example, any general requirements under the Corporations Act and the SIS Act).

Prohibiting ongoing fee arrangements in respect of MySuper products

3.42 These amendments stipulate that the fees related to financial product advice must be paid in accordance with the terms of an arrangement entered into by the member. Such an arrangement cannot be an ongoing fee arrangement. [Schedule 3, item 7, section 29VA(9A)(d) and (e) of the SIS Act]

3.43 The amendments are not intended to prevent holders of MySuper products from accessing financial product advice through their superannuation account on an ad hoc or once-off basis. The amendments do not prevent a member accessing multiple instances of one-off advice. However, to ensure that members' rights are protected, they need to enter into a new non-ongoing fee arrangement each time they seek advice.

3.44 Superannuation trustees are permitted to continue to charge fees for intra-fund advice without entering into an arrangement under section 99FA. Intra-fund advice cannot be ongoing advice (see section 99F of the SIS Act). Such fees are usually charged as administration fees. The charging rules in section 29VA(2) to (4) of the SIS Act apply to administration fees and mean that any such fees can only be charged to members on a collective basis. This may be through the same flat fee or as the same percentage of a member's account balance or a combination of both. [Schedule 3, item 3, section 99FA(3) of the SIS Act]

Consent to charge the fee

3.45 In addition to being satisfied that a fee is charged in accordance with an arrangement, superannuation trustees can only pass on the cost of providing financial product advice to a member in accordance with the terms of a written consent from that member. [Schedule 3, item 3, section 99FA(1)(b) of the SIS Act]

3.46 The trustee must either have the member's consent document, or a copy of it. [Schedule 3, item 3, section 99FA(1)(e) of the SIS Act]

Ongoing fee arrangements

3.47 The requirement about ongoing fee arrangement consent complements the additional requirements introduced into Division 3 of Part 7.7A of the Corporations Act by Schedule 1 to the Bill. Those obligations prevent 'fee recipients' from deducting or arranging the deduction of, fees from a client's account without the client's written consent.

3.48 If the fee recipient holds the account from which the fee is to be deducted, new section 962R of the Corporations Act requires that the client has consented to the fee recipient deducting the fee from their account. If the fee recipient does not hold the account (for example because it is held by a third party, such as a superannuation trustee) new section 962S of the Corporations Act requires that the client has consented to the fee recipient arranging to have the fee deducted from their account.

3.49 A failure to comply with the requirement to obtain consent also means that the arrangement is terminated (see new section 962FA of the Corporations Act).

3.50 The new fee rules in the SIS Act require that, for ongoing fee arrangements, the member has consented to the fee being deducted in accordance with the requirements in new section 962R or 962S of the Corporations Act in Schedule 1 to the Bill. Under these sections a fee recipient cannot deduct or arrange for the deduction of ongoing fees without consent. [Schedule 3, item 3, section 99FA(1)(c)(i) of the SIS Act]

3.51 This requirement is separately imposed on superannuation trustees under the SIS Act to ensure that they are always satisfied that the applicable consent is in place for ongoing fee arrangements, and that they obtain the written consent of a member (or a copy of that consent) before determining that a fee can be charged. The requirement is particularly relevant for trustees who do not provide the advice, as the requirement to obtain consent under the Corporations Act still applies to the fee recipient.

3.52 For fees charged in accordance with ongoing fee arrangements, the consent must also satisfy any requirements specified by ASIC in relation to ongoing fee arrangements under new section 962T of the Corporations Act (requirements relating to consent). This ensures there is symmetry between the consent requirements under the respective regimes in the event that ASIC determines requirements for the giving of consent. [Schedule 3, item 3, section 99FA(1)(c)(ii) of the SIS Act]

Non-ongoing fee arrangements

3.53 For arrangements that are not ongoing fee arrangements (that can apply to fee arrangements for MySuper products) the member's consent must be for the superannuation trustee to directly or indirectly pass the cost onto the member of providing financial product advice in relation to the member. The amendments also allow ASIC to specify requirements about the content of the consent through a legislative instrument. [Schedule 3, item 3, sections 99FA(1)(d)(ii) and 99FA(2) of the SIS Act]

3.54 This instrument making power does not extend to the form in which consent must be provided. This ensures that trustees and advisers have the flexibility to develop consent forms in a way that is compatible with their existing systems to reduce their compliance costs.

3.55 The requirement that the written consent is provided by the member to the fee recipient ensures that third parties, such as an employer, cannot provide consent on the member's behalf. [Schedule 3, item 3, section 99FA(1)(b)]

3.56 It is expected that superannuation trustees would keep records of written consents they receive in relation to both ongoing fee arrangements and non-ongoing fee arrangements to be able to show their compliance with the requirements introduced by these amendments.

Withdrawal and variations of consent

3.57 A member may notify a superannuation trustee, in writing, that they withdraw or vary their consent for the trustee to charge the costs of financial product advice for the member to their superannuation account. A trustee may also be notified of a withdrawal or variation of consent by a fee recipient.

3.58 In relation to ongoing fee arrangements, under Division 3 of Part 7.7A of the Corporations Act fee recipients must also provide notice to trustees within 10 business days if the ongoing fee arrangement ceases to have effect (new section 962V of the Corporations Act).

3.59 From the date a trustee is notified of withdrawal of consent, the trustee cannot charge any further costs for financial product advice to a member (unless the charge is permitted under another consent). Similarly, if a trustee is notified that an ongoing fee arrangement has ceased, they cannot charge any further costs to the member under that arrangement. From the date a trustee is notified of a variation to a consent, the trustee can only charge further costs for financial product advice to the member in accordance with the varied consent.

3.60 For an ongoing fee arrangement, merely informing a trustee (where the trustee is not the fee recipient) of notice to withdraw does not affect whether a valid consent exists for the purpose of the Corporations Act. If a member wishes to withdraw their consent and terminate an ongoing fee arrangement, they must do so in accordance with new section 962U of the Corporations Act which requires the member to provide notice in writing to the fee recipient.

Fees for intra-fund advice

3.61 The new requirements do not apply to the cost of financial advice that is shared by passing it on to the individual member and other members of the fund. [Schedule 3, item 3, section 99FA(3) of the SIS Act]

3.62 This ensures that superannuation trustees retain their existing ability to collectively charge members for intra-fund advice. The existing requirements in section 99F of the SIS Act must continue to be complied with in relation to intra-fund advice.

3.63 Where a member is charged for a combination of costs that are individually and collectively charged, the new requirements only apply to the extent that the costs are individually charged. Notwithstanding that they may be charged at the same time, individual and collectively charged costs continue to be separately identifiable and the character of one does not affect the character of the other.

3.64 In addition to the prohibition in section 99F of the SIS Act, the inappropriate passing of costs from a member to other members is generally prohibited by the duties and covenants contained in the SIS Act, including the best interests duty and requirement to fairly distribute costs between classes of beneficial interests.

General administration of the new fee rule

3.65 Consistent with section 99F of the SIS Act, the new fee charging rule is administered by ASIC. This outcome is achieved through separate amendments to table item 32 of section 6(1) of the SIS Act that are being made by Schedule 9 to the Financial Sector Reform (Hayne Royal Commission Response) Bill 2020 in respect of the Government's response to recommendations 3.8, 6.3, 6.4 and 6.5 of the Financial Services Royal Commission.

Consequences of contravening the new fee rules

3.66 There are a range of existing enforcement tools available to APRA and ASIC under the SIS Act to enforce compliance with the general fee rules and the MySuper fee rules.

3.67 A standard condition on all RSE licenses that are held by superannuation trustees is compliance with the 'RSE licensee law', which includes the general fee rules and MySuper fee rules. ^[2]

3.68 If a superannuation trustee fails to comply with a provision of the SIS Act, including the general fee rules and the MySuper fee rules, APRA can issue directions under section 131D or 131DA of the SIS Act requiring the trustee to comply.

3.69 Failure to comply with directions made by APRA is an offence with a maximum penalty of 100 penalty units (see section 131DD of the SIS Act). If a body corporate trustee is convicted of an offence, section 4B(3) of the Crimes Act 1914 allows a court to impose a fine of up to 500 penalty units.

3.70 Furthermore, if a superannuation trustee becomes aware that it has breached or will breach a licence condition, and is of the view that the breach is or will be significant, the trustee must report that to APRA. Failure to comply with this requirement is an offence with a maximum penalty of 50 penalty units. Such breaches may also be reportable to ASIC under the Corporations Act.

3.71 Currently, a superannuation trustee who has authorisation to offer a MySuper product must comply with the general fee rules and the MySuper fee rules. If a trustee does not comply with these rules, or APRA has reason to believe that they cannot continue to comply with these fee rules, APRA may remove their authorisation to offer a MySuper product.

3.72 A failure to comply with the general fee rules and MySuper fee rules can constitute a breach of the 'financial services law', compliance with which is a standard obligation on an Australian financial service licensee (see section 912A(1)(c) of the Corporations Act).

3.73 ASIC may take action in relation to entities that hold an Australian financial service licence through the enforcement and regulatory tools available to them under the Corporations Act. These include imposing additional conditions on a licence, issuing banning orders and suspending or cancelling a licence.

Application and transitional provisions

3.74 The amendments apply from 1 July 2021 in relation to any fees payable under an arrangement entered into on or after that time. [Schedule 3, item 8(a)]

3.75 The amendments apply 12 months from 1 July 2021 in relation to any existing arrangements that were entered into before 1 July 2021. [Schedule 3, item 8(b)]

3.76 This ensures that any existing arrangements, including ongoing fee arrangements, have a transitional period before the amendments begin to apply.

3.77 This transitional period is consistent with the 12 month period for existing ongoing fee arrangements in Schedule 1 to the Bill. For existing ongoing fee arrangements, the transitional requirements in section 1673F(2) of the Corporations Act apply, as inserted by Schedule 1 to the Bill (see Chapter 1).